Asked in Business & FinanceBusiness Accounting and BookkeepingManufacturingFinancial Statements
Explain Direct and indirect cost?
February 27, 2016 1:32PM
A direct cost is a cost than can be attributed directly to a product; examples include materials used in production, electricity used by a machine making the product, worker hours spend operating the machine to make the product.
An indirect cost is a cost than occurs but cannot be attributed directly to a product; examples include electricity used by lighting, the account staff wages, business rates.
indirect costs, like direct costs can be both fixed and variable: business rates are fixed (for a year) but the cost of electricity used to light the factory floor is going to be variable depending upon how much the machines are used and staff being present - there can also be more than one product being made on the factory floor on different machines, but only one set of lights over the whole floor - one light could easily cover 2, 3 or more machines.